In a moment I'm going to show you a chart for EOG Resources Inc. (NYSE: EOG).
As I looked at the chart for this oil and natural gas development company, and positioned myself for a possible trade, an old song happened to come on the radio. It's a catchy tune that my friends and I used to "try" to dance along with.
Fast-forward to today, and as the song plays in my head, I'm almost moved to dance again by the profit pattern I'm seeing develop for us on this chart!
The Pattern That Few Others See… That Will Produce Winners
I call what we see on this chart my "DarkNet Pattern." It's something that only a few of my friends know about. DarkNet is my version of a contrarian system. Now this doesn't mean I am standing on the train tracks reflexively taking the opposite side of any trade. Rather, it means I love the overall direction of a trade, but am buying on pullbacks. That's where DarkNet comes in.
In short, DarkNet analyzes trends. Computers identify these short- and long-term channels every day, and when two or more channels collide, this typically indicates a change in the stock's direction.
Now it's one thing to have a method, but it's something else to be able to back-test it using past data. But we can do precisely that. Let's take another look at the chart and focus on the red arrows. Each of these represents a buy (the low-end) and sell (high-end) point in the past.
Now, let's dig just a bit deeper than the chart above, and get into some of the nitty-gritty of EOG and DarkNet.
The table above shows not only the current buy that has occurred, but some info on the last three signals. The last three signals generated a profit of roughly $6 per share. The worst drawdown on any of these three trades was again roughly $6, but overall, all three past trades were profitable at an average of just over 12%. Not bad for a readily spotted pattern.
The other interesting piece of news is the average time frame in the trade… 15 days. This is good news regardless of whether you are a stock or options trader. I'll explain why.
Most retail stock traders fall into one of three loose categories:
- Novice: They buy a stock and hope it goes higher.
- Semi Pro: They buy a stock, and have a target and loss projection on it.
- Pro: They buy a stock, and have both price and time targets on it, so as if they were playing a game of financial chess, are thinking ahead of the crowd.
Knowing that we have an average of 15 days in this particular trade is great news because you now have a time target for the trade. This lets you know not only what you may use as price risk, but the average time your money will be tied up, in this case 15 days.
Let's Talk About Making 300% on the Option Trade
The option trader, if he or she were a buyer, already has the stop-loss built in, which is the premium on the option. An option trader can also build in a target for the option based on the trader's target price for the stock, in this case, for EOG. Let's take a look at a recent example:
Now this example shows the trader buying a June week 1 87-call option for the price of $5.40. Since each contract controls 100 shares, that means this contract will cost the buyer $540. Also keep in mind the expiration date on the option, in this case, 23 days. This is several days past the 15 day average time in the stock, which is great. So our time target for holding the stock is well within the expiration date of this option.
What about price movement risk?
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About the Author
Tom Gentile is one of the world's foremost authorities on stock, futures and options trading.
With more than 25 years' experience trading stocks, futures, and options, Tom's style of trading systems and strategies are designed to help individual investors propel themselves past 99 percent of the trading crowd.
Is this analysis of EOG a buy recommendation?
Tom, I love your reviews and explanations of these options. I've learned, however, because of past "bad advice" to be a little more conservative than most, as I try to rebuild my portfolio. When I reached 50% in your AAPL trade yesterday, I was very happy to "take the money and run". I'm just wondering if you would recommend a % point at which you might cut your losses on these trades, rather than losing the entire premium spent on the option?
Jesse, the call options in the article above reflect a bullish stance on EOG, so the short answer is YES.
Linda,
First I am so happy that your learning from me. A few things I plan on teaching you and others is to trade like a good Chess Player. A good chess player always thinks 2-3 moves ahead of the game. Now lets put this into perspective.
When I place a trade, the first thing I ask myself is “What if I am Wrong?”
I got some incredible tools at my disposal, but they aren’t 100% right all the time. I will do one of two things… either draw a support or resistance line on the stock I am trading options on and use that as a stopping point, or I may just simply cut my losses if the option I am buying drops by 50%. No use in letting it all get away from me, right?
Next question, which is just as important… “What if I am Right?”
This is important because taking profits is just as crucial to success as taking losses. Many times in the past, I simply let profits turn to losses, because I didn’t have a plan on when to get out. Kudo’s to you for taking that profit! Heres what I do… Like a chess player, its a 3 step process…
TAKE HALF – I love doubles, so therefore, my rule of thumb is that if a trade doubles in value before my time is up, I take half of the position off. The rest of it I consider a free trade, I am using someone else’s money now… A lot easier to deal with.
TAKE ALL – I will take all or the remainder of the profits if my trade hits the stock target I am looking for. For Apple, that’s around 134-135 area. By my watch we are halfway there…
TIMES UP – At this point, my time is up on the trade, and if I still have the position on, win or lose, I take it off no matter what, and put that money to use somewhere else.
I hope this helps you… My job here is to educate you so you can do this yourself, and create your own opinion and trading plan to back it up.
Tom
I use to hear the same thing as, TAKE HALF, CONSIDERING IT SOMEONE ELSE'S MONEY, WHEN IN REALITY IT IS REALLY YOUR MONEY YOU ARE GAMBLING WITH. I live in Las Vegas nv and when I was working I would hear I'm playing on the houses money, when they could go to the cashier and get real money for their chips, suckers every one of them.
just reading this article and I am a bit confused.
Is this a week one of june or the monthly because from May 19 to June 5 is 17 days so where is the 23 days coming from?
Hi Nell,
To answer your question, that case study was done on the 13th of May, that is where the number is derived from. Take a look at the 3rd chart in the article, and to the far left is "Leg Date".
Hope this helps, Tom
Hello Tom
thank you for taking to time to reach out to us. I looked over are your articland see you are on a winning streak. I bought ego yesterday. I was wondering if we should be concerned with the gap down. dose that change the pattern that you are aiming to profit off of. so far i'm down slightly, but look at the charts of some of you other recommendations that happened before and they are profitable now.
thank you
Joe
Tom
Thank you for taking thee time to teach us. I was wondering if the gap down changed the chart pattern that you were looking to profit from?
Joe
Hi Joe,
Thanks for your comments… Winning streak huh, now dont JINX me! Seriously though, trading is about knowing that winners and losers will both come, and its the long term equity curve moving higher thats most important to me.
EOG is one of those patterns that is like catching a falling knife. Meaning that we are buying what I call a channel collision, and long term this pattern works, but it doesn't come with a bit of drawdown here and there. For me thats where the option comes in, as our buffer or stop loss in this case. Though I am not one to risk the entire option premium of this trade, I look for a stop loss in case I am wrong. As for EOG, its a round number stop of 85. That would stop me out of this trade and move on if it were to happen before the options expire.
6/18/15
Dear Tom,
My investment $ are in my IRA
I am not permitted to SELL calls (naked calls)
Do U think UR $2000 fee will be worth it to me under these conditions?
Sincerely,
Harvey
OK I have bit the bullet and joined Money Calendar Alert. I am looking forward to being part of your winning recommendations.
As for EOG I have been selling weekly out of the money puts for quite some time and doing very well until the week of June 4th when a major hedge fund big shot made an erroneous statement and also announced he was actively selling EOG short.
I decided to accept the shares instead of taking the loss. Since then I have been selling calls and waiting for the stock to rebound as I am confident it will.
I am also participating in your AMZN and AAPL trades. I am hoping AMZN will retreat to $435 by tomorrows expiry and give me a 400%+ profit on my first trade. If it stays above I will have to settle for around 200%.
Thank you.
John.
Hi Tom,
The Amazon double was great!
I learn best by doing and I didn't see any new 'doubles' to get into last week. Did I miss something? Your sales presentation suggested that we would average two trade opportunities each week.
When can we expect you next CURRENT trade suggestions.
Thanks.
Hi Tom,
I bought your Optionetics program long time ago and I am about to join your Money Calendar now and I am wondering if this EOG is a loosing trade. I just pulled out EOG chart, since May 19, EOG has been on down hill and this EOG trade is a call not a put.
Please explain! Thanks!
Hi Tom, please help me understand X pattern and green red lines .How to find them on the chart.Thanks!